31.10.2013

Maria Kopsakangas-Savolainen

and Rauli Svento

Finnish Environment Institute

Thule Institute Department of Economics and Martti Ahtisaari Institute of global

business and economics, University of Oulu

Marginal cost of producing electricity varies significantly according to the time of the day

The true cost of consuming electricity varies hour by hour but prices do not reflect this

Retail electricity prices should reflect their true opportunity costs

New technology has enabled hourly metering and so the technocal constraint is disappearing

Albadi, M.H., El-Saadany, E.F. (2008)

Faruqui, A., Sergici, S. (2010)

Saele, H., Grande, O. (2011)

Borenstein, S., Holland S.P. (2005)

Borenstein, S. (2005, 2007a, 2007b, 2009)

Holland and Mansur (2008)

Kauppi (2009)

Kopsakangas-Savolainen and Svento (2012a, 2012b, 2013a,b,c)

Variable costs

(€/MWh)

Hydro

Win

d

Nuclear

Import

CHP

Conden

sing

(Coal

&pea

t)

Conden

sing (

Oil

)

Gas

turb

ines

Production by

capacity type

(TWh/a)

Demand

Wholesale

price

Impact of

emission trade

Variable costs

with emission

trade

200 400

1. Identify load duration curve 2. Specify demand function:

𝐷ℎ 𝑝𝑟, 𝑝𝑓 = 𝛼𝑝𝑟ɛ + 1 − 𝛼 𝑝𝑓

𝜀 𝐴ℎ, ℎ = 1,… , 8760 3. Determine capacity structure technology by technology according

to profit maximizing rule:

𝜋𝐺 = 𝑤ℎ𝐷ℎ − 𝑐𝐷ℎ − 𝑟𝐾

8760

ℎ=1

,

4. Determine flat rate such that retail market breaks through:

𝜋𝑅 = 𝑝𝑓 −𝑤ℎ 1 − 𝛼 𝐷ℎ 𝑝𝑓 + 𝑝𝑟 − 𝑤ℎ 𝛼𝐷ℎ 𝑝𝑟

8760

ℎ=1

5. Simulate until the equilibrium for both market is reached

Albadi, M.H., El-Saadany, E.F. (2008). A summary of demand response in electricity markets. Electric Power Systems Research 78 (2008) 1989–1996.

Borenstein, S., Holland S.P. (2005). On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices. The RAND Journal of Economics Vol. 36, No. 3 (2005) 469-493

Borenstein, S., 2007a. Customer risk from real-time retail electricity pricing: bill volatility

and hedgability. Energy J. 28, 111–130.

Borenstein, S., 2007b. Wealth transfers among large customers from implementing

real-time retail electricity pricing. Energy J. 28, 131–149.

Borenstein, S., 2009. Electricity pricing that reflect its real-time cost. NBER Reporter,

pp. 9–12 (Winter).

Faruqui, A., Sergici, S. (2010). Household response to dynamic pricing of electricity: a survey of 15 experiments. Journal of Regulatory Economics 38: 193-225.

Holland, S., Mansur, E.T., 2008. Is real-time pricing green? The environmental impacts

of electricity demand variance. Rev. Econ. Stat. 90, 550–561.

Kauppi, O., 2009. A model of imperfect dynamic competition in the Nordic Power market,

HSE, Acta Universitatis Oeconomicae Helsingiensis A-350. Dissertation.

Saele, H., Grande, O. (2011). Demand Response From Household Customers: Experiences From a Pilot Study in Norway. IEEE Transactions on smart grid (Vol. 2, No. 1) 102-109

Kopsakangas-Savolainen, M., Svento, R. (2012a). Real-Time Pricing in the Nordic Power Markets. Energy Economics, Vol 34, Issue 4. pp. 1131-1142.

Kopsakangas-Savolainen, M., Svento, R. (2012b). Modern Energy Markets. Springer, London.

Kopsakangas-Savolainen, M., Svento, R. (2013a). Promotion of market access for renewable energy, Environmental and Resource Economics, 54: 549-569,DOI: 10.1007/s10640-012-9605-z.

Kopsakangas-Savolainen, M., Svento, R. (2013b). Economic value of intermittent generation in the Nordic power market. Energy and Environment Research, Vol. 3, No. 2.

Kopsakangas-Savolainen, M., Svento, R. (2013c). Hydropower production profiles: impacts on capacity structure, emissions and windfall profits, Journal of Energy, under review.